Question

Chapter 3 - Journal Cost-Volume-Profit Analysis Break Even Analysis Break Even is the level of operations where Profit equals zero. EXERCISE 1: Abner Corporation makes a product that sells for $200 per unit. The Variable Costs per unit are $120. Fixed Costs total $500,000 each year. Abner currently sells 7,500 units per year. Calculate the number of units that Abner must sell to break even. Use the equation method to solve for the number of units Abner needs to sell to breakeven. If you need help, refer to the examples in the text Equation Method: Sales Variable Costs Fixed Costs Profit STEP 1 = Set profit to ZERO STEP 2= Solve for N STEP 3- Solve for N STEP 4= Breakeven in UNITS Units In STEP 3 above, solving for N resulted in dividing Fixed Costs by Unit Contribution Margir Remember, Unit Contribution Margin (UCM) is calculated as follows: Unit Contribution Margin (UCM) = Sales Price per Unit - Variable Cost per Unit So, an easier way to calculate the breakeven point in units is simply use this formula: Fixed Costs | UCM = Breakeven in Units

Answer 1

Sales - Variable cost - Fixed cost = Profit

Break even in units

Unit contribution margin = Sales in units - Variable cost in units

=$200 - $120

= $80

Breakeven in units = Fixed cost / Unit contribution margin

= $500,000 / $80

= 6250 units

Abner needs to sell 6250 units to acheive break even

Break even in dollars

CM ratio = Contribution / sales

= (7500 x 80) / (7500 x 200)

= 600,000 / 1,500,000

= 0.4 = 40%

Break even in dollars = Fixed cost / CM ratio

= 500,000 / 0.4

= $ 1,250,000